Bankruptcy

Motor Vehicles

In bankruptcy, certain assets are protected while others vest in your bankrupt estate.

Protected assets can include your standard household contents and furniture, your tools of trade up to a certain value, vehicles that are used mainly for transport up to a certain value, superannuation policies and compensation payouts.

Unprotected assets can include real estate, cars worth more than the protected limit, shares, artwork, copyrights and term deposits – to name but a few. As a result, the asset will vest in the trustee, meaning that the asset comes into his or her ownership.

The trustee’s job is to realise the value of your interest in these vesting assets. Now contrary to popular belief, it can be possible for this to be done without selling the asset to a stranger. Instead of putting your property on the open market and selling to the highest bidder, a trustee can look to sell your interest in unprotected asset(s) to a non-bankrupt third party, such as a co-owner.

Motor Vehicles – will I lose my car?

People are often very worried about their vehicles when it comes to bankruptcy. In our experience, a lot of the time this concern is genuinely unwarranted.

You will not automatically lose your car as a result for filing for bankruptcy. Here’s why.

Each bankrupt person is allowed to own vehicle assets worth up to a certain value. Currently this amount is $7,900.

For vehicles under finance, this applies to the equity in the vehicle.

Here’s the thing though; while cars are assets, they’re not like houses or other real property in the sense that, they don’t hold or gain value over time. Most of the time, they actually depreciate in value the longer you own them and the more you use them.

Car loans are usually secured to the vehicle you’re purchasing. The car loan provider will often have a chattel mortgage, lease or a charge over the car which is registered on the Personal Property Securities Register (PPSR). This register alerts other people to the fact that you still owe money on the vehicle and, as a result, it isn’t really your car to sell.

When you take out a loan to purchase a car, the car will immediately depreciate when you drive it out of the dealer’s yard. In fact, the amount that you owe on the car loan will more than likely be higher than the value of the car.

‘‘I was concerned about that (MY CAR), or thought I might have to sell it and get a really cheap car! I need my car for my job, so it was imperative that I had access to it. Of course, I was able to keep the vehicle, no problems.”

Robert NSW

How the value of a vehicle under finance is worked out during bankruptcy

Let’s look at the following scenario as an example.

A couple of years ago Daniel took out a secured car loan with Happy Bank in order to purchase a car. The car now has a market value of $30,000 and the payout figure of the loan with Happy Bank is currently $37,365.00.

So the equity position of the car is as follows:

Value of the car: $30,000
Less Loan to Happy Bank: $37,365
Equals Equity: $-7,365

Importantly, the threshold in bankruptcy does not relate to the value of the vehicle under finance. It relates to the equity in the vehicle, as this is the only portion of the vehicle owned by the person who is bankrupt.

So if we apply the threshold to Daniel’s situation, this is what we might see:

Daniel’s Equity: $-7,365
Vehicle asset threshold: $7,900

Currently, Daniel owns $-7,365 worth of vehicle assets. This is a negative number. The threshold is a positive number and currently $7,900. Daniel’s car is therefor not over the threshold and presently protected in bankruptcy.

In order for Daniel’s vehicle to vest in the trustee, there needs to be more equity than the current vehicle asset threshold in bankruptcy.

Note: You may have been thinking, why is the lender not unable to repossess the car, given that Daniel is bankrupt and all? Section 301 of the Bankruptcy Act voids certain provisions in contracts. Specifically, it voids any provisions that a lender may have to terminate, modify or repossess regarding the sale of property, in a lease of property, in a hire purchase agreement, licence or PPSA security agreement, if the purchaser has become bankrupt or commits an act of bankruptcy or executes a person insolvency agreement.

However, if Daniel was in arrears with his payments, that’s a different story altogether. The lender still reserves the right to repossess the car if Daniel fails to make his car payments, but this would also be the case even if Daniel wasn’t bankrupt.

I had a novated lease which the leasing company converted to a loan. I was still able to pay off the car lease.”

Susan, NSW

How the value of a fully-owned vehicle is worked out during bankruptcy

We’ll use another example. Let’s say that Daniel had decided to file for bankruptcy after he finished paying off his car loan and that his car was worth $18,000.

His vehicle might then be assessed as follows in bankruptcy:

Value of the car: $18,000
Less Threshold: $7,900
Equals Excess above the threshold: $10,200

The excess above the threshold vests in the trustee for the benefit of creditors.

There are a few ways to deal with this excess.

  1. The trustee will sell the vehicle and, if this is Daniel’s only vehicle, any proceeds of the sale above motor vehicle asset threshold will go to the trustee. The remaining $7,900 will go back to Daniel so that he can purchase another vehicle within the limit of the threshold.
  2. In the event that Daniel wants to keep this particular vehicle, the trustee needs to be paid the excess amount of $10,200. Sarah or another non-bankrupt third party can make an offer to pay the trustee this sum of money. Some trustees may even allow for this amount to be paid off over instalments.
  3. Neither of the above may occur. The trustee may determine that it’s not commercial to even deal with the car at all, although this tends to only happen when there is a very small excess amount.

Watch our video to learn more about what happens to vehicle assets in bankruptcy

Are you considering bankruptcy and own vehicle assets above the protected threshold? 

There are options. Talk to one of our experts on 1300 369 168 or make an online enquiry now.

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